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Summary

  • Cloud-based provider of payroll and HCM software solutions for medium-sized organizations.
  • Top line increased 40% for the six months ended December '13 vs December '12.
  • March is the largest quarter in PCTY's business.
  • PCTY believes its current target addressable market is $8.0 billion.

Based in Arlington Heights, IL, Paylocity (NASDAQ:PCTY) scheduled a $100 million IPO on the Nasdaq with a market capitalization of $734 million at a price range midpoint of $15 for Wednesday, March 19, 2014.

PCTY is one of 11 IPOs scheduled for this week. The full IPO calendar is available at IPOpremium.

SEC Documents

Manager, Joint managers: Deutsche Bank, BofA Merrill Lynch, William Blair

Co-Managers: JMP Securities, Raymond James, Needham & Co.

End of lockup (180 days): Monday, September 15, 2014

End of 25-day quiet period: Monday, April 14, 2014

Summary
PCTY is a cloud-based provider of payroll and HCM software solutions for medium-sized organizations, which PCTY defines as those having between 20 and 1,000 employees.

PCTY's solutions were specifically designed to meet the payroll and HCM needs of medium-sized organizations.

Based on the analysis below, PCTY believes its current target addressable market is $8.0 billion.

Top line increased 40% for the six months ended December '13 vs December '12. March is the largest quarter in PCTY's business.

Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

2013yr

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Paylocity Holding (PTCY)

$735

8.1

-167

9.7

9.7

10%

Conclusion
The rating on PCTY is buy.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above.

Business

PCTY is a cloud-based provider of payroll and HCM software solutions for medium-sized organizations, which PCTY defines as those having between 20 and 1,000 employees.

PCTY's solutions were specifically designed to meet the payroll and HCM needs of medium-sized organizations.

PCTY's platform offers automated data integration with over 200 related third-party systems, such as 401(k), benefits and insurance provider systems.

Business opportunity

PCTY believes that existing payroll and HCM solutions have limitations that cause them to underserve the unique needs of medium-sized organizations.

Traditional payroll service providers are primarily focused on delivery of a variety of payroll processing services, insurance products and HR business process outsourcing solutions.

Many of these solutions offer limited capabilities and lack a unified and configurable payroll and HCM suite.

Enterprise-focused payroll and HCM software vendors offer solutions that are designed for the complex needs and structures of large enterprises. As a result, their solutions can be overly complex, expensive and time-consuming to implement, operate and maintain.

Market opportunity
According to market analyses published by International Data Corporation, or IDC, titled Worldwide and U.S. Human Capital Management Applications 2013-2017 Forecast: The Cloud Spurs Continued Growth (May 2013) and U.S. Payroll Outsourcing Services 2013-2017 Forecast and Analysis (October 2013), the U.S. market for HCM applications and payroll outsourcing services is estimated to be $22.5 billion in 2014.

To estimate the addressable market, PCTY focuses its analysis on the number of U.S. medium-sized organizations and the number of their employees.

According to the U.S. Census Bureau, there were over 565,000 firms with 20 to 999 employees in the U.S. in 2010, employing over 40 million persons.

PCTY estimates that if clients were to buy its entire suite of existing solutions at list prices, they would spend $200 per employee annually.

Based on this analysis, PCTY believes its current target addressable market is $8.0 billion.

Although PCTY's existing clients do not typically buy the entire suite of solutions, PCTY plans to sell a broader selection of solutions to existing clients by expanding their use of PCTY's solutions.

Clients

As of June 30, 2013, PCTY served 6,850 clients across the U.S., which on average had between 95 and 115 employees during each of the last three fiscal years.

Services

PCTY's Paylocity Web Pay product is its core payroll solution and was the first of its current offerings introduced into the market.

PCTY believes payroll is the most critical system of record for medium-sized organizations and an essential gateway to other HCM functionality.

PCTY has invested in, and PCTY intends to continue to invest in, research and development to expand its product offerings and advance its platform.

Seasonal
Recurring revenue and costs are positively impacted in the quarter ended March 31 as a result of preparation of W-2 documents for clients' employees in advance of tax filing requirements, which generally means that the quarter ended June 30 has been lower than the prior quarter.

Dividend Policy

No dividends are planned.

Competition

The market for payroll and HCM solutions is fragmented, highly competitive and rapidly changing.

PCTY's competitors vary for each of its solutions and include enterprise-focused software providers, such as Ultimate Software Group, Inc., Workday, Inc., SAP AG, Oracle Corporation and Ceridian Corporation; payroll service providers, such as Automatic Data Processing, Inc., Paychex, Inc. and other regional providers; and HCM point solutions providers, such as Cornerstone OnDemand, Inc.

5% stockholders

Entities affiliated with Adams Street Partners 29.6%

Jeffrey T. Diehl 29.6%

Steven I. Sarowitz 53.1%

Steven R. Beauchamp 7.0%

Use of proceeds

PCTY expects to net $66.7 million from its IPO. Proceeds are allocated as follows:

to repay amounts outstanding under a note issued by PCTY to Commerce Bank & Trust Company on March 9, 2011. As of December 31, 2013, PCTY had $1.3 million outstanding under this note.

the balance of the net proceeds of this offering for working capital and other general corporate purposes, including to finance PCTY's growth, enhance and improve its products and services, fund capital expenditures, or expand its existing business through investments in or acquisitions of other businesses, solutions, or technologies.

Following the completion of this offering, PCTY will have the right to acquire one of its resellers at any time. If PCTY elects to acquire this reseller in the future, PCTY may use a portion of the net proceeds from this offering to effect such purchase. However, PCTY does not currently know when it would effect this acquisition or the purchase price to be paid to acquire the reseller.

Disclaimer: This PCTY IPO report is based on a reading and analysis of PCTY's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Paylocity